Will NY disaster revive tech services niche?

The terrorist disaster last week could prompt businesses to turn toward outsourcing more of their technology needs to ensure their information is safe, analysts say.

January 2, 20024:43 PM PST

The terrorist disaster last week could prompt businesses to turn toward outsourcing more of their technology needs to ensure their information is safe, analysts say.

Outsourced services, such as Web hosting, e-mail and Net infrastructure management, have seen a lack of demand in the past year as corporations spent more carefully amid the U.S. economic downturn. But fears brought on by recent terrorism, and the related potential for lost data, may spur businesses to turn to companies such as Exodus Communications, Digex, Loudcloud, Critical Path and other Internet services firms.

"The gravity of the situation is such that it brings home to lots of companies that if you have information you want to protect you need to have it backed up in multiple locations," said Laurie McCabe, a hosting industry analyst and vice president at Summit Strategies.

Others in the industry agree, and think the events of the past week will spur the industry toward using more backup services. "As far as hosting goes, if you had 10 good reasons to do it, now you have 11," said analyst Peter Labe of Buckingham Research.

"I think it's still too early to tell. We'll probably get an idea in a few weeks," said Exodus Communications spokeswoman Maureen O'Connell. "We've been communicating with our customers closely, but what it will mean long term remains to be seen. People are still just dealing with the immediacy of what's happened."

Recalls Y2K bug
O'Connell said that corporate concerns about the Year 2000 computer bug had prompted many businesses to consider outsourced Internet and communications service providers for data backup, storage and disaster-recovery options.

Meanwhile, stock in Exodus spiked Monday, gaining 68 percent to 57 cents in midday trading. The company, which has indicated recently that it would consider viable acquisition offers, said it would not speculate on the reason for Monday's boost.

Other rivals are preparing for an influx of new customers. Intel Online Services, the chipmaker's Web hosting unit, is anticipating an increased need for disaster-recovery services. As a result, the company late last week created an Emergency Technical and Data Center Services Hotline and posted a message on its Web site.

Intel spokeswoman Erica Fields said the company has seen an early increase in calls, particularly from the Northeast, seeking information about Intel's managed Internet services and disaster-recovery services.

Similarly, in a recent report, investment bank Salomon Smith Barney said the disaster could cause corporations that previously had halted telecommunications spending to bolster their systems.

"This could consist of more broadband capacity needs, greater backup facilities and data storage," Salomon Smith Barney wrote. "Companies will be looking for greater redundancy of their network in case vital parts of a network are disabled."

Spreading it around
It stands to reason that corporations may be more apt to geographically disperse their data at regional data centers, which could lure them to the Web hosting companies.

"We'll definitely see a trend as companies reevaluate their IT structure and take a second look at their outsourcing and data center" needs, said communications analyst Kevin Giboney of D.A. Davidson, an investment research and asset management firm.

Although Web hosting companies would be happy with the increased business--particularly at a time when many have been hammered by the dot-com demise--they are reluctant to appear ready to capitalize on the nation's misfortune. Regardless, analysts believe customers will begin asking tougher questions about the backup services offered by outsourced services companies.

Some services companies, however, might not benefit even if businesses line up for more hosting and data services. Many in the Web hosting sector are facing tough times, which might dissuade companies from going with troubled companies such as Critical Path and Exodus.

"There's a perceived risk with going with some companies because of some financial uncertainty," Adams Harkness & Hill analyst Alex Arnold said.

Arnold and others believe businesses that want to purchase such services will scrutinize potential partners closely.

Credit Lyonnais analyst Rick Grubbs says companies will proceed cautiously in a number of areas. "Companies will take a hard look at not only their processing, but also their people assets, and try to spread them around," he said.